Earnings Suggest Little Hope for Barnes & Noble

Barnes & Noble (NYSE: BKS) has made valiant attempts at keeping its business relevant amid the shifting trends, but things continue to look bleak as the company reported its fiscal 2014 second-quarter earnings. To be fair, the company did post a sizable gain in its EBITDA, partially due to attractive textbook rental revenue -- a high-margin, high-demand line of business. Barnes & Noble management deserves commendation for its expense management. Cost management is crucial and can serve as a bridge between difficult times and better ones. The thing is, it's not a long-term strategy. Is there any way Barnes & Noble can pull things around?

Earnings recapConsolidated revenue dropped 8% this quarter to $1.7 billion. Retail, college, and Nook sales were all lower but on point with the company's internal expectations. With store closures, lower online sales, and the brick-and-mortar drop, consolidated same-store sales dipped down 4.9%. With Nook sales excluded, the figure gets slightly less depressing, at 3.7%.

Management noted that the comparable quarter from last year included the release of Fifty Shades of Grey.

Broken down by segment, retail dropped 7.5%, college dropped 4.6%, and Nook plummeted more than 32%, with device sales leading the way in the sales drop at 41% year over year. More concerning to investors should be digital content sales -- which were down more than 21% this quarter.

Management absorbed much of the top-line decreases with smart cost management and better store productivity. Retail EBITDA grew an impressive 21.2%. College EBITDA declined by $3 million, but that is largely due to the fact that the company does not recognize rental revenue up front, but instead amortizes it over a period of several months (semesters, one would assume).

Looking ahead, Barnes & Noble management is sticking to its previous guidance with same-store sales down in the high single digits, and brick-and-mortar same-store sales down in the low to mid single digits.

Any hope?The Nook was a great idea. It was priced better than the iPad and easily tied into the brick-and-mortar business (Nook cafe!). But Amazon ruined that with the Kindle. Fellow fool Rick Munarriz breaks down this thesis here.

So what does that leave the company with? The brick-and-mortar operations are not all that appealing. eBook sales in general are still growing at an impressive clip, and even hardback books are selling more than they have in previous periods -- but "not horrible demand" isn't much of a business plan for a $1 billion company. Barnes & Noble remains a private takeover candidate, but as I see it, not much more. Investors should tread very carefully.

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